An analysis by the National Economic Research Associates (NERA) on the U.S. Department of Labor’s (“DOL”) proposed conflict of interest rule and definition of the term “fiduciary” under ERISA (the “proposal”), and associated Regulatory Impact Analysis (“RIA”). The estimates in the above documents form the basis of the Department of Labor’s argument that the proposed conflict of interest rule would provide a net “benefit” to the public.
To study these costs associated with the DOL proposal, NERA also collected account-level data from a number of financial institutions in order to construct a representative sample of retirement accounts. The dataset includes tens of thousands of IRA accounts, observed over a period from 2012 through the first quarter of 2015.
Key findings include:
The DOL proposal may effectively make the commission-based brokerage model unworkable for investment accounts covered by ERISA due to the operational complexity and costs of compliance that would be required under the Best Interest Contract Exemption.
In 2011, the DOL estimated that consumers who invest without professional advice make investment errors that collectively cost them $114 billion per year. Applying the DOL’s own logic to the present proposal, combined with the likelihood that a large number of investors will lose access to advice, will result in aggregate costs that may exceed the DOL’s own estimates of the benefits of the proposal.
The RIA produces many different numbers representing different underlying assumptions, resulting in industry cost estimates that vary wildly from about $2 bil./year to $50 bil./year. The range of numbers is so wide it suggests no scientific confidence in their own methodology.
The academic research cited in the RIA is misapplied.
Overall the DOL’s misapplied use of the academic literature and erroneous conclusions on investor behaviors render their regulatory impact analysis unreliable and incomplete.